29 Mar Why you should invest in shares
Why you should invest in shares.
So you’ve managed to squirrel away some savings through hard work, intelligent decisions, and maybe a little bit of luck. You’ve got a nice little chunk of cash sitting in your bank account (or maybe under the mattress), it’s earning little to no interest, not even keeping up with inflation, and you’re just not sure what to do with it.
If you haven’t come from a financial background, investing your funds can be a scary and confusing process. There’s a myriad of options out there, some are easy enough to get your head around, but the vast majority of them are a confounding mess of disconcerting terms, numbers, rules and regulations. So how do you know which is the best way to invest money?
Well, investing in shares provides one of the simplest and most profitable ways to put that cash to good use. Countless studies have shown that share trading is one of the best long-term investments, often outperforming other assets such as bonds, funds and property. And with the introduction of online trading, it is one of the easiest ways to put your cash to work.
So what are the advantages of investing in shares? For starters, it’s as easy as opening a bank account – except you do it with a stockbroker and not a bank. These days this can all be done online, you don’t even need to leave the house. Pop your details into an online application, email in some ID and you’re away.
One of the major benefits of trading stocks over most other financial assets is the liquidity it offers. When you hold shares in a company you can sell these shares at any time, and after a brief two day settlement period the cash is back in your bank account – ready to go for any unforeseen emergencies. Try doing that with a term deposit or an investment property.
The diversity that share trading provides is second to none. With only a small investment you can gain access to tens of thousands of stocks, on multiple exchanges, in an increased number of countries (assuming you have a good broker of course). You can invest in a wide array of sectors such as finance, technology, health, retail, property, utilities, commodities, and pretty much anything else you can think of. All from the same account.
Obviously, we invest in shares to make capital gains. This occurs when you buy a stock for say $100 and the share price goes to $150. You’ve made $50 for every share you own. But when you own a diverse share portfolio it is more than likely that you will receive dividends as well. Dividends are a cash payment from a company to a shareholder, paid out when that company has excess cash it doesn’t need to reinvest. It’s a straight out cash payment into your back pocket.
There are tax advantages too. If you have capital losses on a certain stock you can use this against any tax you may pay on any capital gains you have received. In Australia, there are also tax advantages for dividends in the form of franking credits. You can check with your tax advisor on how this may benefit your situation.
So share trading is easy and one of the best ways to invest money in Australia. It’s extremely liquid, filled with diverse investment opportunities, and most importantly it is effective. So how do you go about setting up an account? And how do you know which shares to buy?
Well, finding a good broker is important. You need to make sure your broker has a good online platform, along with trading access for your mobile phone and tablet if necessary. You want them to have access not just to Australian shares, but also to exchanges in the US, the UK, and Canada at the very least. And you shouldn’t need to pay the earth. Don’t go to someone who is going to charge you a monthly fee just to have an account. You want somebody who’ll charge a small commission for both Aussie overseas stocks. Trading in foreign stock markets shouldn’t cost you any more than trading in Australia.
So once you’re set up, what are the best stocks to buy? Well, as we mentioned earlier, it’s important to attempt to set up a diverse portfolio. The old saying “don’t have your eggs in the one basket” couldn’t be truer when it comes to your share investments. If your funds are spread out over multiple segments, and even countries, you’ll be able to withstand any downturns in any particular area with more ease. While one or two of your stocks will be struggling the others will be chugging along nicely.
There is a plethora of good information on stocks out there these days. If you want to increase your knowledge on what stocks to buy there are hundreds of paid subscriptions which can give you recommendations. There are books galore on stock trading and how to buy stocks. There are websites such as CNBC, Marketwatch and Bloomberg which provide access to all the latest stock market news. And you yourself can be a good resource for stock picking. You use the products that these companies sell every single day of your life. You might just spot an opportunity in your day to day life before a majority of others get on board.
But most importantly, your stockbroker should be your best point of contact to provide you with all of the stock and portfolio advice you need. Your broker should be your most important resource. Someone to give you ideas, or someone to bounce your ideas off. The right advisor can be an invaluable benefit to your trading experience.
So there you have it. Investing in shares is simple to do, cost-effective, and a great way to invest your money. You can start with as little, or as much, as you like. It doesn’t matter who you are, or where you’re from, the trading world is at your fingertips.